New Geneva Report | Inflation and the Great Recession

Wednesday, October 25, 2017

Since the Great Recession of 2007-08, inflation has behaved unusually. With US unemployment falling, policymakers anticipated a rise in inflation that did not materialise – a phenomenon mirrored across the developed world.

This occurrence is neither arbitrary, short-term, nor simply a problem of the measurement of errors. Rather, inflation has been low and stable since 2001 – a remarkable occurrence, given the global economy’s experience of the worst recession since the Depression. 

Against the backdrop of falling unemployment and the rise and fall of commodity prices, the 19th Geneva Report on the World Economy examines the various explanations of inflation, including the effects of reactionary monetary policy, commodity price volatility, and nominal rigidities

It finds that the multiple and diverse shocks to the economy essentially offset each other, with a small but persistent downward shift in inflation and little change in volatility. This experience holds important policy lessons, particularly for central banks, to protect against the role of 'luck' in the future.

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